Barela v. Locer

• Decision Date: 04 September 1985
• Docket Number: No. 15527,15527
• Citation: 103 N.M. 395,708 P.2d 307,1985 NMSC 80
• Parties: Robert S. BARELA, and Viola Barela, Plaintiffs-Appellants, v. George B. LOCER, Defendant-Appellee.
• Court: New Mexico Supreme Court

Page 307

708 P.2d 307

103 N.M. 395

Robert S. BARELA, and Viola Barela, Plaintiffs-Appellants, v. George B. LOCER, Defendant-Appellee.

No. 15527.

Supreme Court of New Mexico.

Sept. 4, 1985.

Rehearing Denied Nov. 13, 1985.

[103 NM 396] Peter F. Lindborg, Eaves, Darling, Anderson & Porter, P.A., Albuquerque, for plaintiffs-appellants.

James E. Womack, Albuquerque, for defendant-appellee.

OPINION

WALTERS, Justice.

Plaintiffs Robert S. and Viola Barela sued defendant George B. Locer for breach of contract, alleging that Locer had violated a realty purchase agreement containing an option of first refusal to mineral rights in the realty. The trial court granted summary judgment in favor of Locer, but allowed the Barelas to amend their complaint to allege mistake and misrepresentation, and to ask for reformation of contract. After a bench trial, the court entered judgment for Locer. The Barelas appeal and we reverse.

On May 7, 1970, the Barelas, as purchasers, and Locer, as seller, signed a purchase agreement for certain real estate. Under the agreement, Locer retained all mineral rights, but also agreed "to grant to purchaser an option of first refusal to acquire mineral rights on said premises and such option shall survive and be enforceable for a period of one year after death of seller." On June 22, 1970, Locer executed and delivered to the Barelas a warranty deed for the surface rights of the property. The deed reserved to Locer, as grantor, "all minerals of every type, character and description," but made no reference to the Barelas' right of first refusal to acquire mineral rights. The Barelas accepted the deed.

In May 1979, Locer leased to Alex Phillips all of his mineral rights in the realty. The Barelas became aware of the Phillips lease in late 1979. In January, 1981, claiming that the lease to Phillips constituted a breach of their right of first refusal, Barelas sued. Both parties filed motions for summary judgment.

The trial court concluded that the terms of the warranty deed extinguished the earlier purchase agreement provision for first refusal under the doctrine of merger, and granted summary judgment for Locer. At the same time, it allowed the Barelas to amend their complaint to request equitable reformation of contract based on legal theories of mistake and misrepresentation. Following a trial without a jury, the court found that Locer had made no misrepresentations or fraudulent statements and that there had been no mutual mistake of fact. The court concluded not only that the doctrine of merger applied to the right of first refusal, but also that the lease to Phillips did not constitute an acquisition of mineral rights by Phillips. Finally, the court decided that the Barelas had no rights in the subject mineral interests and entered judgment for Locer.

I. The Purchase Agreement and the Deed

The Barelas argue that their right to have first refusal of the mineral rights did not merge into the subsequent lease, that the mineral lease was indeed a violation of that right, and that they are therefore entitled to damages and reformation of their deed. We agree that the lease breached the agreement between Locer and the Barelas. We discussed the doctrine of merger in El Sol Corp. v. Jones, 97 N.M. 645, 642 P.2d 1104 (1982), where a prior agreement that the buyer would reconvey the minerals to the seller after a certain period was held to be of no effect because it had merged into the subsequent mineral deed conveying title to the minerals in fee simple absolute, without reservation or reference to the prior agreement. We there stated the doctrine of merger, quoting from Continental Life Insurance Co. v. Smith, 41 N.M. 82, 88-89, 64 P.2d 377, 381 (1936), as follows:

In the absence of fraud, mistake, etc., the following stipulations in contracts for the sale of real estate are conclusively presumed to be merged in a subsequently delivered and accepted deed made in pursuance of such contract, to wit: (1) Those that inhere in the very subject-matter of the deed, such as title, possession, emblements, etc.; (2) those carried into the deed and of the same effect; (3) those of which the subject-matter conflicts with the same subject-matter in the deed. In such cases, the deed alone must be looked to in determining the rights of the parties.

But where there are stipulations in such preliminary contract of which the delivery and acceptance of the deed is not a performance, the question to be determined is whether the parties have intentionally surrendered or waived such stipulations. If such intention appears in the deed, it is decisive; if not, then resort may be had to other evidence.

El Sol Corp. v. Jones, 97 N.M. at 647, 642 P.2d at 1106.

Locer contends that his ownership of mineral rights was covered in both the purchase agreement and the deed. He relies on the following language from the Continental Life case to assert that the deed's absolute reservation of mineral rights in himself governs the entire transaction and that the right of refusal merged into the deed:

If covenants regarding the same subject-matter, consistent or inconsistent, [sic] with those in the contract appear in the deed, they are conclusively presumed to have merged therein * * *.

Continental Life Insurance Co. v. Smith, at 88, 64 P.2d at 380-381. We note that the quoted material continues:

but if the deed contain no evidence of intention on the subject, then the question is open to other evidence to determine such intention, and in the absence of evidence there is no presumption that either party intended to waive stipulations in the contract by the delivery or acceptance of a deed.

Id. We find the latter language more applicable to the present case.

Although both the purchase agreement and the subsequent deed address the subject matter of Locer's mineral ownership by expressly reserving that interest to Locer, only the purchase agreement refers to Locer's future disposition of any mineral rights. A contract granting a right to refuse a future purchase is not equivalent to a contract of sale; at best, it gives only the right to purchase upon the terms of the agreement. Keefer v. United Electric Coal Companies, 292 Ill.App. 36, 10 N.E.2d 836 (1937); Kenton Coal & Oil Co. v. Petroleum Exploration, Inc., 287 Ky. 563, 154 S.W.2d 556 (1941). See also Master Builders, Inc. v. Cabbell, 95 N.M. 371, 622 P.2d 276 (Ct.App.1980), cert. denied, 95 N.M. 426, 622 P.2d 1046 (1981). See generally III American Law of Property Sec. 11.17 (1952).

We have stated that "[a]n option to purchase is a contract where the property owner, in exchange for valuable consideration, agrees with another person that the latter shall have the privilege of buying property within a specific time on terms and conditions expressed in the option." Hueschen v. Stalie, 98 N.M. 696, 698, 652 P.2d 246, 248 (1982). See also Northcutt v. McPherson, 81 N.M. 743 at 745, 473 P.2d 357 at 359 (1970) (option is right of optionee to comply or not comply with option's terms, at sole choice and election of optionee). By contrast, a right of first refusal shifts the initiative back to the promisor; the holder of the right has no opportunity to exercise it until the promisor/seller decides to offer up the property for sale. Although denominated an "option," the true nature of the promise in the purchase contract was a bargained-for right of first refusal. For a general discussion of the comparison between a right of first refusal and an option, see 1A Corbin on Contracts Sec. 261 (1963).

Thus, the nature of an option, and even more so of a right of first refusal, differs fundamentally from an outright sale of fee simple ownership. "A lease with an option to purchase real estate creates no estate in the lessee beyond his leasehold interest." Hueschen v. Stalie, 98 N.M. at 698, 652 P.2d at 248. No sale occurs until the option is exercised in accordance with its terms. Id. In El Sol, we held that "title to the minerals was the very subject matter of both the agreement and the deed." El Sol Corp. v. Jones, 97 N.M. at 647, 642 P.2d at 1106. By contrast, in the present case not only does the provision in the purchase agreement relate to a different subject matter--possible conveyance of mineral rights--than does the broad reservation of mineral rights in the deed, but the two provisions do not conflict. The deed covers what both parties contemplated concerning the current ownership of the mineral rights. The purchase agreement covered what both parties contemplated would be the Barelas' right if Locer ever decided to convey the mineral rights. The right to acquire the mineral rights could be exercised only at Locer's discretion and the provision relating to future alienation, as expressed in the purchase agreement, was consistent with the seller's ownership of those rights as expressed in the deed. By its terms, the right was enforceable until one year after Locer's death and, thus, was clearly intended to coexist with Locer's ownership interest. See also Sanchez v. Dickinson, 551 S.W.2d...